The see-saw continues...
It's hard for anyone to say with certainty where this market is headed, however in the absence of time-earned wisdom, I'll make a stab at it. All I have heard recently is how the fed's action a couple weeks ago, cutting the discount rate wasn't so much a bailout but was the fed stepping in to save the operability of the banking system. That's fine, call it what you wish, but it still served as a bailout. All the market pundits on CNBC tell us that the Fed's sole mission is to ensure the stability of the nation's banking system. Well that statement is about to be put to a bit of a test in my opinion.
Market valuations and earnings indicate that the economy is on solid ground, and in little need of a rate reduction to fuel earnings. The other piece of the puzzle and the one that people still do not want to talk about is the average mortgage consumer in this country over the last 7 years. A large chunk of them will not be able to afford their mortgages when their rates adjust out. This isn't a newsflash, but what may be is the fact that these ARM's are adjusting out at a much greater rate over the next nine to twelve months. The issues that exacerbated the credit crunch are only going to get worse. The Fed's mission may now include ensuring the stability of the banking system by ensuring the stability of the housing market. A series of rate cuts could provide the cushion the housing market needs to stabilize. The stock market probably doesn't need, nor deserve a rate cut, but housing certainly does.
So my guess is that the Fed cuts in September and each of the meetings after that until the end of the year, because the housing system is now irrevocably intertwined with the banking system which the Fed is charged with ensuring the stability of. So now the loan that Joe Smith got from some deadbeat loan shark, which he used to buy his $400k house on his $50k salary has a direct effect on the entire economy. But what do I know I'm just a kid.
The market will continue to see-saw sometimes violently in the absence of some clear indication by the fed on what they intend to do with rates.
So where does a possible rate cut leave us? Back in the Greenspan liquidity snowball, of course. Excess liquidity drives inflation. Commodity prices will rally because the dollar will have been weakened by the Fed's series of "economic stimulus". I think gold, silver and oil will be very strong and if the excess supply issues in natural gas can be resolved, I think the gains in natural gas could be very dramatic. There are very strong long-term and international growth prospects, but the credit issue and liquidity issues are just being pushed to a later date. The government these days likes throwing more money at the problem.
I currently own significant positions in SLW and GFI.
Market valuations and earnings indicate that the economy is on solid ground, and in little need of a rate reduction to fuel earnings. The other piece of the puzzle and the one that people still do not want to talk about is the average mortgage consumer in this country over the last 7 years. A large chunk of them will not be able to afford their mortgages when their rates adjust out. This isn't a newsflash, but what may be is the fact that these ARM's are adjusting out at a much greater rate over the next nine to twelve months. The issues that exacerbated the credit crunch are only going to get worse. The Fed's mission may now include ensuring the stability of the banking system by ensuring the stability of the housing market. A series of rate cuts could provide the cushion the housing market needs to stabilize. The stock market probably doesn't need, nor deserve a rate cut, but housing certainly does.
So my guess is that the Fed cuts in September and each of the meetings after that until the end of the year, because the housing system is now irrevocably intertwined with the banking system which the Fed is charged with ensuring the stability of. So now the loan that Joe Smith got from some deadbeat loan shark, which he used to buy his $400k house on his $50k salary has a direct effect on the entire economy. But what do I know I'm just a kid.
The market will continue to see-saw sometimes violently in the absence of some clear indication by the fed on what they intend to do with rates.
So where does a possible rate cut leave us? Back in the Greenspan liquidity snowball, of course. Excess liquidity drives inflation. Commodity prices will rally because the dollar will have been weakened by the Fed's series of "economic stimulus". I think gold, silver and oil will be very strong and if the excess supply issues in natural gas can be resolved, I think the gains in natural gas could be very dramatic. There are very strong long-term and international growth prospects, but the credit issue and liquidity issues are just being pushed to a later date. The government these days likes throwing more money at the problem.
I currently own significant positions in SLW and GFI.
posted by Brian P. Egan at 6:24 AM
0 Comments:
Post a Comment
<< Home